The move toward green energy is here to stay, and renewables will see steady growth for years to come.
Unfortunately, many renewable companies are highly speculative or too richly valued for many investors.
Justin Paget/DigitalVision via Getty Images Regardless of one’s political views on climate change, most of us can agree that governments and populations around the developed world are making an effort to go green as fast as they can.
You can try and deny the ESG trend, but the fact of the matter is that renewable energy continues to play a larger role in energy production. We can see this with the steady growth of renewable power capacity expansion: Source: Renewable Energy Market Update 2021
But while we’re believers in green energy over the long term, the renewable sector certainly has its fair share of hype and speculation. There will be huge winners, but the majority of companies will likely fall by the wayside.
So the question becomes: How can we get exposure to the upside of the industry, without taking on excess risk?
My own strategy is to look for “midstream” opportunities in the renewable energy market.
If you’re unfamiliar with the term, midstream, upstream, and downstream are categories I’ve borrowed from the oil & gas market.
Here’s a quick rundown: Upstream companies engage in the exploration of new assets.
Downstream companies process, refine, and then distribute the commodity.
Midstream companies transport and store the commodity.
The reason I prefer the midstream business model is because it’s the most stable in terms of cash flow, as midstream companies often have contracts extending years out into the foreseeable future.
When it comes to renewable energy, I like to think of midstream companies as the middlemen (and women) of the sector.
Midstream renewable companies are those that own stable, productive renewable energy assets, like: Geothermal energy plants
Wind farms
Solar panel arrays Hydropower dams The biggest benefit of these companies is that they have long-term contracts with customers who have a constant need for energy, such as large corporations, utility companies, universities, governments, etc.Below I’ll highlight some of the more specific advantages of midstream renewable energy companies, and then explore some of the best players in the space. The Driving Forces Behind Midstream Renewables Currently, the wind is behind midstream renewables’ sails.
Specifically, we see four major tailwinds that will continue to push the market higher for years to come: Growing Popularity of ESG: The US president is openly pro-renewables and wants to “achieve a carbon pollution-free power sector by 2035.” Provisions in the new US infrastructure bill specifically call for funding and supporting clean energy.
Improved Battery Technology: As storage and capacity of batteries improves, midstream renewables are able to supply energy even when the wind isn’t blowing or the sun isn’t shining.
Carbon Neutral Targets: As governments, corporations, and utility companies continue to aggressively decarbonize, they will simply have to utilize more midstream renewables in the coming decades.
Innovation Lowering Costs: Midstream energy companies are developing greater economies of scale, leading to lower installation and production costs. In this piece, we’d specifically like to dive a bit deeper into the falling costs for midstream renewables.
Wind and solar are slowly becoming cheaper than other traditional energy sources, such as natural gas: Solar costs have already fallen faster than anyone could have predicted. We expect this trend to continue, as innovation and implementation in solar space are still just getting started.This trend goes hand in hand with improved battery storage, as storage costs are also on the decline .
Storage capacity continues to grow exponentially and meanwhile, installation costs of these battery systems were cut in half over a period of just two years.We think it’s likely that battery storage costs halve once again from here, as further economies of scale are implemented.
Renewables produced just 11% of global energy consumption in 2019, meaning there is a huge runway for further growth from here. Investors like Jeremy Grantham think electric generation capacity will double again from here as we “electrify everything that can be electrified.”Meanwhile, governments and large corporations are almost unanimously backing this green energy revolution. To reduce emissions by 80%, governments and private businesses will almost […]
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